SWE Homes, LP v. Wellington Ins. Co., 436 S.W.3d 86 (Tex. App.-Houston [14th Dist.] 2014)
Last month the Texas Supreme Court held in Greene v. Farmers Ins. Exch. that a "vacancy" clause in a standard homeowners insurance policy was not a condition precedent but rather was a basic term of the "scope of coverage." See my discussion of Greene here. So what difference does that make? As discussed in Greene, the insurer's agreement to reimburse the insured for fire damage up to a certain amount, to a specified dwelling, occurring within a specified time period, comprise the basis of the bargain, the essential promise, the "scope of coverage," as the Court called it. Conditions precedent, by contrast, are the ancillary terms and conditions that elaborate the means by which the parties carry out their basic promises. For example, the insured's agreement to notify the insurer "as soon as practicable" of any fire damage and to obtain the insurer's consent to any settlement of a liability claim are conditions. The insured's breach of one of these conditions may excuse reimbursement by the insurer only if the breach is material, i.e., only if the breach causes some material detriment or prejudice to the insurer.
The Greene Court held that the standard Texas homeowners policy contained the insurer's core promise to reimburse fire damage to the insured's occupied residence. In other words, an unoccupied property is no more within the scope of coverage than a fire occurring after the policy period has expired. However, held the Court, the vacancy clause is not a condition on the coverage, permitting the insurer to refuse to cover fire damage if the premises remain unoccupied more than 60 days. No, the clause actually expands the scope coverage by 60 days because the insurer never agreed to cover an unoccupied dwelling in the first place. As I discussed in my earlier post (see above), two justices in Greene concurred in the result but refused to accept the majority's characterization of the vacancy clause as a promise, not a condition.
So what does that have to do with the SWE case? Both cases concern fire damage to an unoccupied residence, and in both cases, the insured was denied coverage based on the vacancy clause. However, in SWE, the mortgage company seeks coverage under the policy's mortgage clause, which permits the secured lender to submit a fire-damage claim up to the amount of its interest in the property. The lower court had held that the mortgagee could not recover if the insured breached the vacancy clause. The court of appeals reversed based on the specific terms of the mortgage clause, which state:
If we [insurer] deny your [insured's] claim because of your acts or because you have failed to comply with the terms of this policy, the mortgagee has the right to receive loss payment if the mortgagee [meets certain conditions].
The SWE court noted that there are two types of standard "loss payee" provisions, one called "open" under which the insurer enjoys no greater rights than the insured; the other, as here, called "standard," which effectively creates a separate agreement with the mortgage company and grants coverage despite the insured's breach of the policy, as long as the mortgagee complies with the conditions of the mortgage clause. One of these conditions is to notify the insurer if the mortgagee learns that the insured abandoned the residence. The mortgagee denied any such knowedge, and the insurer could not show otherwise. Therefore, the mortgage lender was entitled to recover.
The interesting thing about this case is how it contrasts with the reasoning in the Greene majority's decision. The insurer in SWE argued that the mortgagee's rights under the mortgage clause applied only to "covered loss," and a fire occurring after 60 days of abandonment does not fall within the scope of coverage. Sound familiar? That seems to mirror exactly the reasoning of the Greene majority. SWE was decided before Greene, and the appellate court rejected the insurer's argument because it would leave some provisions of the policy meaningless. Specifically, the mortgage clause would have no need to state separate conditions on the mortgagee if it was bound by the insured's breach of policy conditions.
The SWE court also noted that the insurer's argument ran afoul of Section 862.055 of the Texas Insurance Code that protects coverage for the mortgagee if the insured's neglect invalidated coverage. Arguably, this statute is enough to distinguish the SWE decision from Greene. However, we may wonder if the Greene majority's attempt to recast a policy condition as a core promise created something of a tarbaby.
David S. White